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Argentina carmakers slow production as economy wobbles

Charles Newbery Tuesday, April 29, 2014

Tax hikes are damping sales in a sector that drove economic growth for the past decade

BUENOS AIRES, Argentina – PSA Peugeot-Citroen became the latest automaker to suspend workers in Argentina this month, as a worsening economy, high inflation and tax hikes caused sales to plunge.

The local unit of the Paris-based manufacturer suspended about 3,000 workers Monday for three days before a four-day weekend that starts Thursday for Labor Day, Clarin newspaper reported Tuesday, citing company sources.

The company could not be reached for comment.

Peugoet’s decision followed similar moves by Italian truck maker Iveco and France’s Renault to also temporarily suspend workers, a sign of how a slowing economy and errant economic polices are taking their toll on the industry, economists said.

Car sales dropped 25 percent and exports fell 18 percent in the first quarter of 2014 compared with the year-earlier period, causing output to decline 16 percent, according to the Argentine Automakers Association (Adefa), an industry group.

Carmakers say the worker suspensions are designed to slow production and reduce inventories, which have risen with the decline in sales. Other auto manufacturers are planning worker suspensions and early retirement packages.

The government, however, points most of the blame on declining exports to Brazil, the biggest buyer of Argentine-made cars.

“Eighty-six percent of auto exports in volume terms go to Brazil,” Jorge Capitanich, the president’s chief of staff, said Monday in a televised press conference.

Not all are so certain. While an economic slowdown in Brazil has reduced exports, the brunt of the impact has come instead from lower domestic sales, said Diego Giacomini, an economist at Economia y Regiones, a consulting firm in Buenos Aires.

This is for several reasons. The first is that the auto sector along with construction was the motor of the country’s economic boom between 2003 and 2011 and helped to sustain growth between 2012 and 2013 even as most industries slowed, he said.

What’s more, he said much of the rush to buy cars was driven by mid- and high-income earners seeking to protect their net worth against surging inflation.

With consumer prices rising at 25 percent annual since 2010 and interest rates at half that, people turned to cars and properties to protect their savings.

This helped drive up car production 3.7 percent in 2013 compared with the previous year even as overall manufacturing output fell 0.2 percent over the same period, according to the government’s national statistics agency Indec.

The second reason for the slowdown stems from a new tax on luxury goods. The government slapped a 30 to 50 percent tax in January on mid- and high-end cars, which had driven the surge in production and sales, in an effort to curb a three-year decline in foreign currency reserves by stemming the sale of foreign goods.

The industrial sector – including automakers – met with Economy Minister Axel Kicillof on Monday to seek measures to help revive production as the luxury tax has also hit Argentine-made vehicles.

But Cristiano Rattazzi, the president of Fiat Argentina, said Tuesday on Radio Mitre that Kicillof spoke little about their chief concern, inflation.

“Inflation is worrying, very worrying for making investments, for doing calculations,” he said. “When inflation surpasses 30 or 40 percent, an enormous disorder begins in the whole economy.”

Most economists expect inflation to surpass 35 percent this year, and Giacomini said that this pace “will kill economic growth by deterring savings and investment,” which in turn will lead to less spending, retail sales and a loss in jobs.

He expects the economy to contract by 1.8 percent this year after 3 percent expansion in 2013.

Jorge Colina, an economist at the Argentine Institute for Social Development, a think-tank, said there’s still time to turn around the drop in car sales by cutting or removing the luxury tax.

“You can make errors but you can also fix them,” he said.

However, he warned that much of the government’s policies are based on ideology, making it hard for officials to admit mistakes and backtrack.

Instead, he said Kicillof could order automakers to maintain production – and jobs. But that won’t help sales. “You have to cut the luxury tax to recover sales.”